Treasury bonds, investment risk, bankruptcy, small business,

1. The US funds it deficit spending through the sale of government debt such as Treasury Bonds. China has now become the largest creditor of the United States as it now holds a little less than $1 Trillion of US Government Debt. What are the risks and rewards to purchasing foreign securities? And if there are indeed big rewards, why is this type of investment not more prevalent within our own country and with our own domestic investors?

http://www.ustreas.gov/tic/mfh.txt

2. There are two main categories of risks as far as investments are concerned: systematic and nonsystematic. Please provide an example of each type of risk and a way to mitigate both.

3. GM recently faced a restructure plan through bankruptcy court (Chapter 11). In addition to cutting costs by closing plants etc, the company swapped more than $27 billion in bond debt for GM stock. The US government now owns approximately 60%+ of GM by some reports. Is converting debt to equity a viable means of securing working capital and generating cash flow? Are there disadvantages to this type of swap? Do you feel this is necessarily the best plan or are there other alternatives for securing cash and working capital in the short term?

http://money.cnn.com/2009/06/01/news/companies/gm_bankruptcy/

4. According to the Small Business Administration, small businesses account for more than 99% of all firms and over 65% of all new jobs over the last decade. Yet only a miniscule portion of the stimulus package is dedicated to providing relief for the smaller business with the main focus being tax breaks. Will this be enough to aid the smaller business? What are the issues small businesses face in this economy and what, if anything, should the government be doing to help them?

http://web.sba.gov/faqs/faqindex.cfm?areaID=24

5. The credit market within the US is at a standstill. While the government has infused funding to banks, credit is still not flowing. How has this situation affected businesses within the US? Besides cutting costs, what should a business in this economy be doing to mitigate the effects of the credit crunch on its financial sustainability?

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1. The US funds it deficit spending through the sale of government debt such as Treasury Bonds. China has now become the largest creditor of the United States as it now holds a little less than $1 Trillion of US Government Debt. What are the risks and rewards to purchasing foreign securities? And if there are indeed big rewards, why is this type of investment not more prevalent within our own country and with our own domestic investors?

http://www.ustreas.gov/tic/mfh.txt

Government securities are "guaranteed" by the federal government. The US in the last few decades had become the most powerful and wealthy countries in the world. It could be expected that the "guarantee" is a firm safe investment under such circumstances. That is why our securities were attractive to foreign investors. If an American investor is investing in government securities, the investment motivation is usually to ensure a low risk investment without expecting a large return. It does not make sense it invest in other countries with weaker currencies if your investment objective is to conserve and protect your savings. If an investor is seeking a higher return, they would most likely look to corporate stocks and bonds. They would not invest in a riskier foreign government securities with a promise of a low return. Some traders may speculate on the strengthening (or weakening) of a currency and believe that it could be more valuable when redeemed than when purchased however, the risk/return ratio of such speculations are rarely more sensible than other investment tools. To speculate on currency, sophisticated investors would trade the currency itself or engage in foreign currency exchange arbitrage activities.

2. There are two main categories of risks as far as investments are concerned: systematic and nonsystematic. Please provide an example of each type of risk and a way to mitigate both.
Systematic risk is the risk that cannot be diversified away. It is the inherent risk of the markets. Swings in values can be expected due to uncontrollable factors such as economic conditions. For example, investors in Enron, or BP could not control the circumstances that ...

Solution Summary

These questions use real life examples utilizing current conditions in the the American economy and corporate current events to describe the uses, advantages and disadvantages of various investment tools to include domestic and foriegn treasury markets, the GM bailout, and bankruptcy